Now if only the UK didn't have an insane system where all electricity is purchased at the highest cost in the mix.
i.e. if you're buy 99% cheap RE, 1% expensive gas then you're paying for 100% at the higher gas price.
i.e. if you're buy 99% cheap RE, 1% expensive gas then you're paying for 100% at the higher gas price.
That's how commodity producers like farmers can be profitable. The marginal producer makes no profit, but every producer who can get their costs below the marginal producer makes a profit.
If farmers didn't make any money, they'd stop farming and we'd have no food.
Yes, costs have skyrocketed -- combine harvesters start at about a million now. But wheat prices and yields have been high enough to more than compensate.
But Saskatchewan farmers are a great example of a low cost producer. A Saskatchewan farm usually runs about 10,000 acres per operator. UK farms with a couple hundred acres can't compete.
This isn’t a farmers market where individual actors can swiftly respond to supply and demand. This stuff has decades of lead time, is full of regulations and thus long term imbalances.
Nor is this a case of marginal anything. Gas is almost TRIPLE the price [0]. A normal functional efficient market like you have in mind would adjust to that sort of enormous profitability differential, the uk market has not.
https://www.nationalgrid.com/the-great-grid-upgrade/fact-or-...
So, OK, clearly this CCGT electricity here (made with gas) offered for £85 per MWh we're going to buy that, for £85 per MWh.
Now, we also needed all this wind power which bids £5 per MWh. Presumably you'd want to pay them less than £85 per MWh. So, too bad, they bid too low, they get punished right? But since you aren't OK with paying less than the bid price, doubtless if they had bid £84 you'd pay that right?
Notice that the incentive in your model is for everybody to guess what you'll pay and bid just barely below that, whereupon you've wasted a lot of resources, your strategy no longer has any price discovery value, and you're paying almost as much as before. A triumph of... rationality?
How much do you reckon you can save the average household if you do this? £50 per year? Twice that?
That isn’t a “system”. It’s just what happens. Why would the 99% RE be forced to sell at a lower price? They will sell at whatever the market value is. Which is determined by supply and demand. And the gas turbines will only turn on if it becomes profitable for them to turn on at that price. So the causality actually is the other way around. Lots of demand increases electricity prices, higher electricity prices make it profitable for more expensive means of production to be powered up.
The one that I can think of is the government sets the amount of electricity produced, and then it’s rationed. But I doubt the UK would be happy with rationed electricity where your power shuts off the second it’s over. That would be essentially mandatory blackouts all the time.
Not to mention the cost would be held by the government, so you end up paying it in taxes anyway.
Honestly, pricing based on the cost of financing and operation isn't a terrible idea.
Under the current system, when energy becomes hard to produce or more people need it, rising prices means people will reduce. So pricing for cost of financing, sure, but it might be a higher cost because people will consume more.
You can just as easily flip that around: Why should the consumer pay a price that is entirely disconnected from the actual cost of production?
The key is that in the UK gas sets the price almost 100% of the time, vs 25% in Germany or less than 10% in France. The fix: build more of the cheap sources. A patch: cap what gas can bid.
Like if gas is $5 and RE is $1 the RE folks get $5 instead?
Devils advocate would say that might work out in RE's favor. Lower production costs mean more profit and therefore more incentive to build more RE
Edit to answer my own concern: But, reading this article, it does seem like the auction is the offramp. The government takes bids for enough power to supply the country, and once the auction is settled the worst-case cost is paid to all winners. So there's a hope that gas will eventually subsidize its replacement with renewables.
What they're auctioning are what's called "Contracts for Difference". The contract has a "Strike price" which is in essence the price the government (via a for-purpose company) agrees you will be paid regardless of what happens for electricity sold to the system.
Now as the word "difference" might suggest there will be a difference between the market price at any particular moment and this strike price. The CfD works by the government paying you the difference when the market price was lower, and you pay the government the difference when it's higher. You can definitely afford to pay them 'cos you just got to sell power for $$$$
Why do this? Well, the trick is that a government (even if politicians don't always act like it) is here for the long haul. So for them guaranteeing how much you'll be paid for energy you're not going to make for ten years is fine. Tax will still exist in ten years, houses with electric light will still exist in ten years, this is an easy bet. But for a wind farm company, a commercial undertaking, such guarantees are incredibly valuable and would be unaffordable from elsewhere. So this is (relatively) a very cheap subsidy.
When there was a gas price spike because Russia invaded Ukraine the contracted wind farms paid a whole lot of money because of that difference I talked about, if you'd gone freelance, no CfD subsidy well, you're printing cash, 'cos at those prices you probably made back your whole install costs in a year of trading.
https://www.ref.org.uk/ref-blog/382-newly-opened-viking-wind...
(Or in the case of renewables: producing for less profit than they would if they made their contract later)
From the first two you can calculate what you need in terms of £/MWh (include whatever profit you want in there). Now you can go to the government and bid that price in the auction. If you win, you have a safe profit and all risk (and upside potential) now lies with the government. As GP said, in the case of 2022 you would have lost out on revenue. But that’s the price foe guaranteed margins
The CfD part is a technical detail. It ~ doesn’t matter whether you first sell the energy and then go to the government for reimbursement. Or whether you sell the energy to the government which then handles the follow up sale.
What I’m not sufficiently familiar with is whether you _have_ to go to such an auction (i.e. whether the auction also is the mechanism of capacity planning) or whether you are free to bypass this system and just hook up your wind park and carry the risk yourself. But functionally this is an insurance scheme for profits, with a market based pricing system
Still missing something in relation to a point above. Does one of these scenarios involve the operator “paying” or “giving back” actual money when the market price is higher than agreed? As opposed to just operating at a loss or less profit?
If you are interested in the mechanics, then _I think_ (i.e. not first hand knowledge) the operator will join each auction (once per day for each 15 min interval of the next day) and offer his energy amount there. He will then receive the integral of (auction price) times (volume) from “the grid”. If that is too little money he then goes to the government and asks for a top up to (contract price) times (volume). If that was too much he has to pay the government the difference.
But again. That is purely mechanical. The end effect of the contracts is you will always receive say 80£ per MWh delivered. Independent of the MWh was worth 500£ in that 15 min interval or -50£. It’s “just” a risk transfer
Ah I’m seeing a possible confusion. There are two different auctions in the description. The first one is for the CfD price and happens (for each project) once. The second one is the daily-price-discovery one and happens daily
You might need to sit down for this. The wind farms don't use fuel. Wind just happens, it's a natural phenomenon that has no real regard for our stupid "wind farm" even as we're harvesting gigawatts of power the wind doesn't ccare.
If you were thinking "Wait I thought all the providers have these contracts, not just renewables" then er no, they're a subsidy, the CfD is a subsidy scheme. That cheap to make, expensive to run open cycle gas turbine some asshole put on a local industrial estate doesn't get a CfD, it can offer to sell the resulting electricity at market prices, and really the big problem is as you observed, that's possibly less than what it costs to buy fuel. Yeah, it is, bad idea to keep building Open Cycle Gas Turbines I reckon. Sure enough the UK almostly exclusively has more expensive to build but cheaper to run Combined Cycle plants.
CfDs are used to subsidise renewable future power. A long term energy independence strategy. Even if you don't care about the planet warming and the sea levels rising you won't be burning all this gas in a thousand years 'cos there's not enough gas. Whereas the sun will shine until long after we're gone, and the accompanying winds won't stop either.
The size of the subsidy varies, if you're building a pilot plant of a new technology that you're sure will revolutionize clean energy but, alas, no-one ever made one that worked before, the government might be willing to pay you four or five times as much money for your energy, partly because they're not expecting you to actually make any energy because you will likely fail. If your plan's big problem is that it's way less mechanically reliable than you'd like, this is a big incentive to incrementally improve that reliability. If your device that involves being in and out of an incredibly powerful tidal stream of corrosive sea water at freezing temperatures makes power but doesn't crack, tear, fall to pieces or explode in the scheduled period of operation you're that much closer to actually having a useful technology and paying you five times over the odds for the MWh you did make is a reasonable price.
yes
if there's 1mW of gas in the grid then everyone gets paid the gas price
this is called pay-as-clear, and has some positives (strongly encourages RE construction), and some disadvantages (zero long term planning, paying gas generators absurd rates if they can squeeze in at the top of the auction)
UK government is consulting on changes to this system at present
this is not the global oil market
the UK electricity market is a government creation, highly regulated, and only accessible to limited participants
30 minutely, day ahead, pay-by-clear auction markets are not a property of the universe
Instead of focusing on this, here a few more impactful things that would help: 1. Zonal pricing, so that there is an aligned incentive to build production where demand is (connection to the grid is a big limiting factor) 2. Stop providing contracts to renewable where curtailed production gets paid (curtailed energy is paid by consumers as taxes on bills normally) 3. Start allowing to build more renewable so that renewable are setting the marginal price 4. Push utilities to do PPA (power purchase agreements) with producers of RE so they can agree to a fixed price, and a smaller slice of electricity is bought at the auction
There are a few more, but these are the most important.
Regarding your edit: the gas plant is not subsidizing, the customers are paying. But of course at the moment building renewable is so lucrative thanks to this setup, that there is a big incentive to build them. Of course they need to plan for 20-30 years, and the risk of getting to big periods at 0 marginal pricing is real, so builders need to evaluate well the risk (and PPAs can help)
In a non-competitive world what you say would be true (you'd avoid filling in the remaining 1%), but there are a large number of power producers that a cartel is unlikely
Why should an operator of wind turbine sell their kWh for less if the current price is high? That would be stupid.
The point of this is that it's supposed to guarantee windfall profits for wind operators, to make it attractive to keep building out wind until all the marginal gas is pushed out of the market mix. The price being set by the highest-cost source in the mix is a feature for incentivizing buildout, not a bug.
You do marginal pricing because otherwise providers will simply bid what they think the crossover price will be - marginal prices lower prices in the long run because providers try to improve their margins and lower their bids.
Also renewables bid on the spot and day ahead markets really low because their cost is almost entirely capex (and also most are under CfD anyway so may as well bid 0) - the spread isn't nearly as good as the data would imply. If you didn't use marginal pricing you'd have them bidding higher to cover their capex.